On financial deregulation, GOP repeating history, Democrats need to break from recent past

Despite Bernie Sanders’ endorsement of Hillary Clinton, her need to bring in voters from the Sanders camp will put leftward pressure her campaign, even as she begins pivoting back to center for the general election.

Sanders has already moved the Secretary to pledge to sign any $15 minimum wage bill passed by Congress and got her to promise not to cut Social Security, but Democrats on the left are still leery about her stance on Wall Street.

{mosads}This past week, Chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, introduced legislation that will dismantle the Dodd-Frank Act, President Obama’s historic financial reform legislation passed in the wake of the Great Recession. Donald Trump has already endorsed the idea of repeal.  For Secretary Clinton, full-throated denunciation of repeal will draw a clear distinction between her and Mr. Trump as well as signal to Bernie Sanders supporters that she may be willing to take on Wall Street and steer the party back towards the pre-Reagan era of strong financial regulation.

The Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act will allow banks to resume making speculative investments with taxpayer insured deposits, restrict operations at the Federal Reserve and handcuff independent agencies like the Consumer Financial Protection Bureau, which obtains its funding from the Federal Reserve and is therefore not subject to the vicissitudes of a hostile congress. In summary, the Financial CHOICE Act is intended to gut government regulations in the financial and banking sectors, “ending and replacing the mistake of Dodd-Frank.”

Getting rid of Dodd-Frank, however, would take us back to the very regulatory environment that contributed to the 2008 financial crisis, which laid ruin to the American economy.  We are still feeling the effects, with the labor market slowly recovering and wages just beginning to tick upward.

If Hensarling, Republicans in Congress and Wall Street Democrats are successful in repealing Dodd-Frank regulations, they will only be contributing to the growing problem of economic inequality.

This conclusion is rooted in recent research that my colleagues and I have conducted. The research connects the dots between economic inequality, public policy, and perceptions of the major parties in America. Since at least the New Deal, the Democratic Party has been the party of middle and working class Americans. Social Security, Medicare, and most anti-poverty programs were Democratic Party initiatives. These and a host of other policies contribute to a more egalitarian economy. We looked at the data from the last century and a clear pattern emerged – consistent with other recent research, Democratic strength in policymaking institutions produces less economic inequality than Republican power.

We analyzed in particular the effects of financial regulation. For most of the 20th century, Democrats supported robust regulation of the finance sector. Republicans, on the other hand, were less supportive, and it turns out that regulating the finance sector reduces the gap between rich and poor.  Regulations included in the Glass-Steagall Act forced banks to focus on banking, rather than speculative investing. Imposing serious capital requirements limits leverage in the finance sector. And most finance sector regulations make it harder for the finance sector to generate massive profits and the accompanying executive incomes that contribute to economic inequality.

This makes for a nice story in which one party champions the little guy (Democrats) while the other party supports the rich (Republicans). In this scenario, if you’re a middle class American who feels left behind the advice is straightforward – on the economic dimension, the Democrats are the team for you.

But the real story is not nearly so tidy. Around 1980, Republicans and Democrats began to agree on deregulation. We found evidence that this was driven by two factors. First, Democrats’ increasing reliance on campaign contributions from very wealthy donors generally and the finance sector specifically, which pushed them toward softening on financial regulation. Second, the increasing reliance of middle and lower income Americans on credit to maintain their standing of living incentivized Democrats to do what they could to make credit easier to obtain.  This meant that it did not matter which party was in charge when it came to regulation and deregulation of the finance sector.

While we only studied financial deregulation explicitly, there are other issues—trade, for example—where the Democrats have moved toward policies that seem to benefit those at the top more than those at the bottom. Secretary Clinton’s ties to Wall Street and her pledge to put her husband in charge of revitalizing the economy are problematic for those on the left because Bill Clinton is seen as the chief architect of the Democratic move to the middle – championing conservative policies like financial deregulation. It’s clear Sanders supporters have a point when they claim that the Democratic Party has lost some of its policy appeal to middle and lower class Americans.

Now that she is the presumptive nominee of the party Secretary Clinton has to work to convince skeptical Sanders supporters that Democrats can truly be the party of the middle class again.

While it is likely that the left flank of the Democratic Party will eventually support Clinton in the general election, it would be unwise to take this for granted. Clinton’s previous efforts to gain the support of Elizabeth Warren, and her shifts to the left on a variety of issues are doubtlessly designed to shore up support on the left. Clinton has plans to enforce and strengthen Dodd-Frank’s implementation as opposed to gutting it as Republicans have proposed.

These are important efforts. It is essential that voters can see the difference between Republicans and Democrats. On most issues, the policy divergence across the parties shouldn’t be hard to see. But on regulation and deregulation of the finance sector, the Democrats moved toward the Republicans to the detriment of shared prosperity. If we are going to be serious about combatting economic inequality, this state of affairs needs to change. The current presidential election suggests that such a change may be afoot.

Nathan Kelly is an Associate Professor of Political Science at the University of Tennessee and a member of the Scholars Strategy Network


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